In a system of 100-percent-reserve banking, which of the following is true?

• A. Banks must keep all deposits as reserves and cannot lend them out.
• B. Banks are prohibited from accepting any deposits.
• C. Banks can create money by lending out more than their reserves.
• D. Banks are required to keep only a fraction of deposits as reserves.

Answer: (A)

Verified step by step guidance

1. Understand the concept of 100-percent-reserve banking: This means banks are required to keep the entire amount of deposits as reserves and cannot use these deposits to make loans or investments.
2. Recall the role of reserves in banking: Reserves are the portion of deposits that banks hold and do not lend out. In 100-percent-reserve banking, this portion is 100% of deposits.
3. Compare 100-percent-reserve banking with fractional-reserve banking: In fractional-reserve banking, banks keep only a fraction of deposits as reserves and lend out the rest, which creates money through the money multiplier effect.
4. Analyze the given options: Since banks must keep all deposits as reserves in 100-percent-reserve banking, they cannot lend out deposits or create money by lending more than their reserves.
5. Conclude that the correct statement is: 'Banks must keep all deposits as reserves and cannot lend them out.' This aligns with the definition of 100-percent-reserve banking.